Tempted to get in on the next GameStop (GME -7.26%) and take a wild ride on a short squeeze? The fear of missing out is a powerful emotion that could disrupt your investing process and undermine your long-term returns. Investing in stocks is one of the best ways to build wealth over the long term, but it requires you to tune out the short-term noise and be patient. On the "Mindset" show on the Jan. 27, Motley Fool Live show, Motley Fool analyst Tim Beyers and Fool contributors Asit Sharma and Brian Withers discuss two questions that will help you stay focused as an investor.
Tim Beyers: Now you need to ask yourself, I think from a mindset perspective is; what do you expect to happen? What do I expect to happen, if I'm going to do this, and you can apply this by the way, to any investing decision. What do I expect to happen? Here is what this will do for you, this question, if your mindset has shifted to the long term and you say, "Well, I'm going to hold this for 10 years and I think I got a reasonable shot at a 15% annualized return. I'm going to reinvest the dividends and I'm going to build up the dividends that I can get later on in retirement. This is my plan for the stock". It could be that or it could reveal to you like "GameStop's going to 500, man!" and it will show you what your brain is telling you. That's the purpose of the question. Asit anything you want to add to that?
Asit Sharma: It's great, Tim. It's another one of your questions that strips away the things that we try to put in front of our own mind. Those emotional curtains, if you will, that allow us to do what we know we shouldn't be doing. What do I expect? I don't know, I'm watching GameStop go up, so I'm going to plunk a little bit of money and because truthfully, who knows? Unless I'm going to take the data and crunch the data I have access to that is how much of the shares are short. All the statistics in the marketplace plus the access I don't have data to, which is how much the billionaire's ammunition they still have and what is their intent to keep playing this game? These types of things are, to me, sort of fruitless exercises.
But a question like this exposes it and pulls that curtain and puts a mirror up to my face. "Asit, what are you doing, you know, that Domino's Pizza, Inc. (DPZ -0.24%)," I think one of you just mentioned a 10-year time frame, "gained 2,600% in a 10-year period. Why didn't you spend your time, Asit, finding great stocks that have a winning formula? Some of them are going to be phenomenal and will give you much more return than making 100% on GameStop today. But losing 50% of that tomorrow then allocating some more capital and watching it all dwindle away."
Beyers: The natural follow-up to that question is this one right here, a number 4; how realistic is what I'm expecting, what's in my brain, how realistic is that, honestly? You want to test what it is that you're thinking here.
You can discern, and as somebody who has made catastrophically bad, irrational decisions, I just want to validate this. These are the tools that I need for me. Because I have a history of making deeply irrational, bad decisions, and so I need tools to understand what it is that's going on inside my head. Brian, anything you want to add here, and then we're going to hit the questions.
Brian Withers: Awesome. Yeah, I really like having a set of questions and a framework. I remember a class that I went to, I guess a little bit on meditation, and somebody mentioned the distance between stimulus and response. They talked about a neat concept of if you engage your thinking process and your logical process, it will overcome the emotional and fight-or-flight process. They talked about the wizard-brain, overcoming the lizard-brain. When you start to get excited and the emotions take over and you're worried about missing out or having fear of loss, that's your deep-inside feeling lizard-brain. Getting these questions and taking a step back as Asit said, and putting some perspective and putting the mirror helps the wizard brain takeover. Hopefully at least gives you some time before you hit the button on the keyboard that says buy now.
Beyers: Or sell now.
Withers: I think it's great to have these questions. Even if they're not the questions for you, just stepping back and taking a rational look at what's going on.